Looking to Israel for insights

Peter Cohan WALL & MAIN

Published Monday March 25, 2013 at 6:00 am

Israel is widely hailed as a “Startup Nation.”

But not so many years ago, it was a country that prized socialism and distrusted capitalism. And in its transformation to a country that spurs startup companies, Israel offers insights that might help Worcester create a startup common.

I created and led Babson College’s first Israel Startup Strategy Offshore Elective of 26 undergraduates that returned from six days in Israel on March 21.

We went to learn about Israel’s startup ecosystem by meeting with startups and venture investors. The program began with interactive discussions of key concepts and will culminate in May when five teams of students deliver consulting reports to five Israeli startups that they met in Tel Aviv.

Uri Goldberg, who worked in the office of Israeli President Shimon Peres before a stint at McKinsey & Co., offered a new perspective on the origin of Israel as a place for startups. Mr. Goldberg highlighted the key events that transformed Israel from a country that trusted in government to create jobs into one that leads the world in startups per capita.

Since the country’s founding in 1948, many Israelis lived in kibbutzim, essentially farming communities in which people lived together and shared chores in exchange for enough food and money to live and pay their bills.

After the Six Day War in June 1967, in which Israel captured the Sinai Peninsula and Gaza Strip, this socialist approach began to erode. France decided to stop supplying Israel with fighter jets and tanks, and shifted its political alliances to Arab countries that had lost ground in the war. Israel responded in the 1970s by setting a goal of becoming self-sufficient in defense, food and intelligence, Mr. Goldberg said.

This decision spurred government investment in a project to build an Israeli-designed military jet. In the early 1980s, Israel’s banking crisis led to a $7 billion government bailout of its banking system, and Israel could no longer afford that military jet project. So Israel canceled the project, tossing its 10,000 workers and 50,000 contractors out of their jobs.

With their backs up against the economic wall, these workers decided to start companies that would commercialize military technologies. NICE Systems, for example, developed technology to record sound for companies such as insurers and went public three years later. Gilat Satellite Networks developed a communications system, using military satellite technology, that enabled retailers to validate peoples’ credit cards fast. Gilat sold its product to big U.S. companies in 1985 and had a $100 million IPO in 1988.

Government failures and entrepreneurial successes produced a cultural change: Israelis realized that it was a mistake to rely on government to help them survive economically, and that startups could help make the world better while yielding significant personal wealth.

The 1990s featured another big shift in Israeli society that spurred more startup activity. The collapse of the Soviet Union led to a wave of about a million Russian immigrants, many of whom were trained as mathematicians, physicists and engineers. They needed work that could tap their skills.

Israel spent $3 billion trying to create textile factories, among others, in which the Russian immigrants could work. But it was a tiny, $3 million project — designed to create a venture capital industry in Israel — that made the difference. The $3 million would match every $1 in investment from a U.S. venture capital firm with $2 from this fund. When the VC was ready to sell, Israel required it to repay the $2 — leaving most of the gains to the VCs.

All this helped to spur the cycle of startup success that has led Israel to host more NASDAQ-listed companies per citizen than any country.